UPDATE 3-Spectrum ends pet unit sale plan; shares drop

(Recasts with analyst comment, byline, updates share price)

By Aarthi Sivaraman

NEW YORK, July 14 (Reuters) - Spectrum Brands Inc SPC.N said on Monday that it has agreed to end an agreement to sell its pet supplies business to Salton Inc SFPI.PK, sending Spectrum shares down more than 15 percent to a new year low.

Spectrum, whose brands include Rayovac batteries, cited its inability to obtain the consent of its senior lenders to complete the transaction.

The termination of the proposed deal is conditional on Spectrum's payment of $3 million to Salton, which owns Applica Pet Products LLC and sells appliances under various brands, the company said in a statement.

Spectrum's latest announcement comes as several companies are putting merger deals or asset sales on ice, or are renegotiating the proposed deal's terms, as credit conditions tighten amid a weak U.S. economy.

Spectrum itself called off a plan to sell its lawn and garden products business in May, pointing to rocky conditions in the financial markets for the possibility that it may not be able sell the business at an acceptable price.

The company, which owns brands such as Tetra fish food, Remington shavers and Rayovac batteries, had announced plans to sell its pet unit to Salton for $692.5 million in cash in May in an effort to improve its capital structure.

Last month, however, Spectrum revealed that it was not able to get its senior lenders to agree to the sale of the pet supplies unit -- a condition which it had said was necessary for the deal to go through.

Spectrum's lenders may have sought better terms, which could be their reason to block the sale, said William Chappell, an analyst with SunTrust Robinson Humphrey.

"We thought the sale price, equating to 10 (times) trailing EBITDA, was more than fair in light of the current macro economic conditions. However, the lenders pushed for even more favorable terms which led both sides to terminate the deal," Chappell said in a note to clients.

Spectrum said it would continue to operate its pet unit and that it has sufficient liquidity to run its businesses.

"... Our board and management team remain committed to finding and executing appropriate alternatives for reducing the indebtedness of the company," Chief Executive Kent Hussey said.

Spectrum forecast its fiscal 2009 free cash flow from operations in a range of $40 million to $50 million.

Spectrum's shares hit a new year-low, after falling 35 cents or 15.6 percent to $1.90 on the New York Stock Exchange. Its earlier year-low was $2.22 on July 11, while it traded at a year-high of $6.20 in October.

(Reporting by Aarthi Sivaraman, editing by Dave Zimmerman)